A 'golden gap year' taken later in life can have very different financial consequences from one taken at 18, and could affect your State Pension, workplace savings and future pension contributions.
Taking an extended break from work in your 50s or 60s could mean losing not only a salary but workplace pension contributions, while it could potentially leave a gap in your National Insurance (NI) record. People considering using their pension to pay for an extended break also need to be aware that taking money from their retirement savings can have consequences if they later return to work and want to resume pension contributions.
Why older workers are taking time out
Maike Currie, VP Personal Finance at PensionBee, said: “For years, the words ‘gap year’ conjured up images of backpacks, hostels and young people heading off to see the world before starting their careers.
“But increasingly, it’s older generations who are taking time out. And rightly so - why should gap years be wasted on the young?
“After decades spent working, raising families, paying mortgages and saving for retirement, it’s understandable that more people want to enjoy some of that freedom while they’re fit and healthy enough to make the most of it.”
PensionBee has shared five financial checks people should make before swapping work for an extended break.
Check your State Pension and workplace pension
Taking time away from work could potentially leave a gap in your National Insurance record, so it is worth checking your position before setting off. People can use the UK Government's online State Pension forecast service to find out how much State Pension they could receive, when they can claim it and whether they may be able to increase it.
Under the New State Pension, you will normally need at least 10 qualifying years on your NI record to receive any payment. People whose National Insurance record started after April 2016 will usually need 35 qualifying years to receive the full new State Pension, although the amount someone actually needs can depend on their individual record.
Gaps do not necessarily mean losing State Pension entitlement. Some people may qualify for NI credits, while it can also be possible to make voluntary contributions to fill eligible gaps. Before paying voluntary contributions, however, it is important to check whether doing so will actually increase your State Pension.
A year away from work could cost considerably more than the salary you give up. If you take unpaid leave or a sabbatical, your own workplace pension contributions and those made by your employer could stop, depending on the rules of your employer and pension scheme. That also means missing out on the potential investment growth those contributions could have generated over the years before retirement. Anyone planning an extended break should therefore ask their employer or pension provider what will happen to contributions while they are away.
Keep contributions going and be careful with pension withdrawals
Being out of work does not necessarily mean you have to stop paying into a pension altogether. People with little or no relevant UK earnings can generally still receive pension tax relief on contributions of up to £3,600 gross each tax year, provided they are eligible. For a pension using relief at source, this would typically mean paying £2,880 yourself, with £720 in basic-rate tax relief added to the pension. Smaller contributions can also be made, so someone taking a year out may want to factor pension saving into their budget if they can afford to do so.
People who have reached the minimum pension age may consider dipping into a defined contribution pension to fund an extended break, but it is important to understand the potential consequences first. The normal minimum pension age is currently 55 for most people and is due to rise to 57 from April 6, 2028, although some people have a protected pension age.
Flexibly taking taxable income from a defined contribution pension can trigger the Money Purchase Annual Allowance (MPAA). Once triggered, the MPAA generally restricts the amount that can subsequently be contributed to defined contribution pensions while benefiting from tax relief to £10,000 a year. That compares with the standard pension annual allowance of £60,000 for most people, although some people have a lower allowance. The distinction could be particularly important for someone who intends to return to work after their gap year and start making substantial pension contributions again.
Not every withdrawal automatically triggers the MPAA, so anyone considering accessing their pension should understand how the type of withdrawal they make could affect them before taking the money.
Don't forget the cost of coming home
Planning how much money you need while travelling is only part of the calculation. PensionBee recommends keeping an emergency fund separate from the money set aside for the trip and allowing for bills that will continue while you are away, such as mortgage or rent payments and insurance.
People should also consider how they will support themselves when they return, particularly if they have left their job rather than taking a sabbatical and do not have another role waiting for them.
Currie added: “A golden gap year is really about buying yourself something incredibly valuable: time. But you don't want the trip of a lifetime to leave a lasting hole in your retirement.
“Think of it as planning for two journeys at once. There’s the adventure you want to have now, and the much longer retirement still ahead of you.
“Check your State Pension, understand what happens to your workplace pension and think very carefully before dipping into retirement savings. With some planning, taking time out now doesn't have to mean sacrificing financial security later.”
